Mid-Day Report: Sterling Tumbled on Dovish BoE Inflation Report

Sterling dropped further today markets pushed back BoE interest rate hike expectations well into 2015. The BoE’s latest quarterly inflation report turned out to be more dovish than expected. Although policymakers raised the GDP growth forecast to 3.5% from 3.0% previously, they were concerned about the “heightened uncertainty” of slack in economy. The central bank also warned of weakness of pay growth and noted that rate hike would be “gradual and limited”, a comment that sent no further indication of the BOE’s tightening schedule. On global economic outlook, BOE Governor Mark Carney indicated that “geopolitical risks have intensified, and structural adjustment continues in the euro area, where growth is expected to be modest”. Meanwhile, “financial conditions are likely to tighten as the global recovery progresses”. More in BOE Downgraded Wage Growth Outlook, Sent Little News about Tightening.

Also released from UK,, claim counts dropped more than expected by -33.6k in July while claimant count rate dropped to 3.0%. Unemployment rate was unchanged at 6.4% in June. Released from Europe, German CPI was finalized at 0.8% yoy in July. Eurozone industrial production dropped -0.3% mom in June. Swiss ZEW expectations improved to 2.5 in August. Released from US, retail sales was flat in July versus expectation of 0.3% while ex-auto sales rose 0.1% versus expectation of 0.4%.

Japan’s GDP contracted -1.7% qoq in 2Q14, the biggest decline since 1Q11 when the Great East Japan Earthquake occurred. From a year ago, real GDP contracted -0.1%. The GDP deflator rose 1.7% qoq, or 2% yoy, in the second quarter. The contraction was largely in line with expectations and was mainly driven by the payback of the front-loaded demand ahead of the April VAT hike, a constraint on capex amidst the end of PC replacement demand accompanying the termination of Windows XP support and strengthened emissions regulations on special diesel vehicles based on the Off-Road Law. However, net exports contributed 1.1% to growth as decline in imports (-5.6% qoq) outpaced that of exports (-0.4% qoq). More in Japan 2Q14 GDP Contracted -1.7%, 3Q Data Key To BOJ Decision.

China money and credit growth surprised to the downside in July, suggesting that growth remains limited while the economy has bottomed out. Meanwhile, a series of macroeconomic data showed further signs of softening in the economic outlook. As unveiled in PBOC’s latest money and credit report, broad money supply (M2) grew 13.5% yoy in July, decelerated from 14.7% a month ago. While a high base effect in July 2013 might have partial effect, the moderation was driven by the sharp fall of new loans amidst weakness in underlying demand and increased credit and default risks. Outstanding CNY loan growth eased to 13.4% yoy in July from 14% in the prior month. New loans shrank to RMB 385.2B from RMB 1 080B in June, compared with market expectations of RMB 780B. Newly increased Total Social Financing (TSF) slumped to RMB 273.1B from RMB 1.97 trillion in June. From a year ago, TSF grew 16.3% yoy in July, following a 16.9% in the prior month More in Disappointing Chinese Money And Macroeconomic Data Indicate The Need Of Further Easing.

Daily Pivots: (S1) 1.6772; (P) 1.6794; (R1) 1.6831; More

GBP/USD’s fall resumes after brief recovery and dives to as low as 1.6698 so far in early US session . Intraday bias is back on the downside with focus on 1.6692 key support. Decisive break there will confirm larger reversal. And in that case, the fall from 1.7190 medium term top should target 1.6251 cluster support (38.2% retracement of 1.4813 to 1.7190 at 1.6282). On the upside, break of 1.6844 resistance is needed to signal short term bottoming. Otherwise, outlook will stay bearish in case of recovery.

In the bigger picture, price actions from 1.3503 (2009 low) are treated as consolidations to long term down trend from 2.1161. Based on unconvincing medium term momentum, we’d expect strong resistance from 50% retracement from 2.1161 to 1.3503 at 1.7332 to limit upside and bring reversal. Sustained break of 1.6692 will indicate medium term reversal and would turn outlook bearish for 1.4813 support.

GBP/USD 4 Hours Chart

GBP/USD Daily Chart

GMT
Ccy
Events
Actual
Consensus
Previous
Revised
23:50
JPY
BoJ Minutes

23:50
JPY
GDP Q/Q Q2 P
-1.70%
-1.80%
1.60%

23:50
JPY
GDP Deflator Y/Y Q2 P
2.00%
1.60%
-0.10%

00:30
AUD
Westpac Consumer Confidence Aug
3.80%

1.90%

01:30
AUD
Wage Cost Index Q/Q Q2
0.60%
0.80%
0.70%

05:30
CNY
Industrial Production Y/Y Jul
9.00%
9.10%
9.20%

05:30
CNY
Fixed Assets Ex Rural YTD Y/Y Jul
17.00%
17.40%
17.30%

05:30
CNY
Retail Sales Y/Y Jul
12.20%
12.50%
12.40%

06:00
EUR
German CPI M/M Jul F
0.30%
0.30%
0.30%

06:00
EUR
German CPI Y/Y Jul F
0.80%
0.80%
0.80%

08:30
GBP
Jobless Claims Change Jul
-33.6K
-30.0K
-36.3K
-39.5K
08:30
GBP
Claimant Count Rate Jul
3.00%

3.10%

08:30
GBP
ILO Unemployment Rate (3M) Jun
6.40%
6.40%
6.50%

09:00
EUR
Eurozone Industrial Production M/M Jun
-0.30%
0.50%
-1.10%

09:00
CHF
ZEW (Expectations) Aug
2.5

0.1

09:30
GBP
BoE Quarterly Inflation Report

12:30
USD
Advance Retail Sales Jul
0.00%
0.30%
0.20%

12:30
USD
Retail Sales Less Autos Jul
0.10%
0.40%
0.40%

14:00
USD
Business Inventories Jun

0.40%
0.50%

14:30
USD
Crude Oil Inventories

-0.8M
-1.8M

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